馃攳
Renting versus Buying a home | Which is better for you? - YouTube
Channel: Preet Banerjee
[0]
is renting a home really a complete
waste of money you've heard all the
[4]
sayings why pay the landlord's mortgage
when you can pay your own or if you're
[9]
renting you're just throwing money away
the truth is it's possible for a renter
[14]
to end up with a larger net worth than
someone who buys a home but practically
[18]
speaking ownership has worked out better
for most people over the long run to see
[22]
why owning isn't the only long-term
option that can make sense let's start
[26]
from the very beginning when you rent
you're not throwing your money away
[30]
you're getting something in exchange for
it a place to live you are renting space
[36]
for a period of time that just has no
future value after your payment's stop
[41]
when you buy you're actually still
renting but instead of renting space
[47]
you're renting money the difference is
that the money you've borrowed is used
[51]
to buy an asset that will hopefully
appreciate you also happen to be able to
[56]
live in it a mortgage payment consists
of a blend of rent on the money you've
[60]
borrowed more commonly referred to as
interest as well as a payment against
[65]
the balance you've borrowed let's begin
our analysis by doing a straight
[69]
comparison for 25 years with some simple
assumptions and don't worry we'll change
[74]
a few of these later on we have two
brothers we'll call them Owen the owner
[78]
and Roger the renter they each have
$35,000 sitting in their bank accounts
[84]
and have no debt for the time being and
the only difference is Owen wants to buy
[88]
a house today and Roger wants to rent
they both live in Toronto so to begin
[94]
they each have a net worth of $35,000
let's start with Owen the owner he wants
[101]
to buy a $500,000 home a 5% down payment
is $25,000 that means he needs to borrow
[108]
four hundred and seventy five thousand
dollars mortgage default insurance is 14
[115]
thousand nine hundred sixty three
dollars that gets added to his mortgage
[119]
so his starting mortgage balance is four
hundred and eighty nine thousand nine
[124]
hundred and sixty three dollars the
provincial land transfer tax is six
[128]
thousand four hundred and seventy five
dollars in Toronto there is an
[132]
additional municipal landtran
for tax and this amount is five thousand
[136]
seven hundred and twenty five dollars
however there are both provincial and
[140]
municipal rebates available which
together provide five thousand seven
[144]
hundred and twenty five dollars of tax
relief provincial sales tax on the
[148]
mortgage default insurance is one
thousand one hundred ninety seven
[152]
dollars legal fees might be one thousand
dollars title insurance might be five
[157]
hundred dollars the home inspection fee
is $500 and appraisal fees might be
[162]
another three hundred dollars that's a
total of thirty four thousand nine
[166]
hundred and seventy two dollars that
basically eats up Owen the owners thirty
[171]
five thousand dollars in cash but now he
has another asset the house worth five
[177]
hundred thousand dollars and a liability
the mortgage worth four hundred and
[182]
eighty nine thousand nine hundred and
sixty three dollars his new net worth is
[187]
ten thousand and thirty seven dollars
Roger the renter doesn't really have any
[194]
upfront costs he just needs to find a
place to rent and sign a lease he finds
[199]
out that the house next door is
identical to the five hundred thousand
[202]
dollar house but is renting for two
thousand one hundred dollars per month
[206]
so at the beginning of year one his net
worth hasn't changed it's still thirty
[210]
five thousand dollars because of the
large upfront costs associated with
[214]
buying a home Owen the owners net worth
is less than Roger the renters once they
[219]
get the keys to their new homes now we
have to look at the ongoing cash flows
[224]
if Owen the owner can get a three
percent fixed-rate mortgage for a
[229]
five-year term his mortgage payment will
be two thousand three hundred and
[232]
eighteen dollars and 73 cents per month
if we assume he budgets one point two
[237]
five percent of the home's value per
year for maintenance and repairs that's
[241]
five hundred and twenty dollars and
eighty three cents per month to start
[244]
property taxes in Toronto are zero point
seven to three percent currently for a
[249]
monthly cost of three hundred and one
dollars and twenty five cents property
[253]
insurance might start at eighty dollars
per month rounded to an even number that
[257]
gives Owen a total monthly cost of three
thousand two hundred and twenty dollars
[262]
over the next twenty five years the
interest rate on his mortgage may go up
[265]
slightly for future five year terms
Roger the renter only has to add another
[271]
$20 per month to his total for renters
insurance and he's good to go
[275]
his total monthly commitment at this
point is 2120 dollars per month we'll
[281]
assume his rent increases every year
with inflation now to make for a
[285]
mathematically apples-to-apples
comparison we need to factor Roger the
[289]
renter committing the same cash flow per
month to his overall situation so we
[293]
subtract Rogers monthly obligations of
2120 dollars from three thousand two
[299]
hundred and twenty dollars to get $1,100
so Roger the renter will pay two
[304]
thousand one hundred and twenty dollars
per month for rent and he could commit
[308]
eleven hundred dollars per month to also
buying an asset in this case that asset
[313]
would be an investment portfolio let's
fast forward 25 years and assume they
[318]
are both leaving the country
Owen the owner sells his house and the
[322]
gain is tax-free Roger the renter has
paid taxes on investment distributions
[327]
all along and has a capital gain upon
selling his entire portfolio on an
[332]
inflation-adjusted basis what do their
net worth look like now was renting
[337]
really just a total waste well a lot
will depend on how fast housing and the
[341]
portfolio grow over time in a TD
economics report from 2013 titled
[347]
long-run rate of return for Canadian
home prices they suggested 3.5 percent
[352]
before inflation was the long-term
growth rate for housing they also put
[356]
out a report in 2012 that looked at long
term returns for equity markets and
[360]
suggested 7% was appropriate with some
caveats using these numbers to start we
[366]
find the following using rounded
approximate numbers for Owen the owner
[370]
his house is now worth 1 million 182
thousand dollars he has no mortgage left
[376]
so his liabilities are zero to sell his
house would cost $64,000 after tallying
[382]
up a five percent realtor Commission GST
and legal fees that leaves him with 1
[387]
million one hundred and eighteen
thousand dollars adjusted for inflation
[391]
his net worth is 681 thousand dollars
Roger the renter's portfolio has grown
[397]
to 1 million in 25 thousand dollars and
that's after subtracting the
[402]
tax drag of distributions paid along the
way he had no mortgage to begin with so
[406]
his liabilities remain at zero but upon
sale of his portfolio he has to pay tax
[411]
on the capital gain of roughly seventy
seven thousand dollars leaving him with
[416]
nine hundred and forty nine thousand
dollars adjusting for inflation we get a
[420]
final net worth of five hundred and
seventy eight thousand dollars so after
[424]
25 years he's one hundred thousand
dollars behind Owen the owner now we've
[428]
just seen how renting doesn't
necessarily mean you're throwing all
[431]
your money away if you're disciplined
you can increase your net worth over
[435]
time too but let's take a look at how
changing just a few variables can
[439]
dramatically change the results what if
Owen the owner moves a few times he'll
[444]
have transaction cost to sell his first
house and then new costs to buy his
[448]
second house if he moves every ten years
the costs will bring down his ending net
[453]
worth to five hundred and fifty three
thousand dollars which means Roger the
[457]
renter would have actually had a higher
net worth at the end of twenty five
[460]
years now what if Roger the renter
doesn't actually save as much as he
[465]
should have he might think he will save
the full difference each year but it's
[469]
much easier to skip a voluntary
contribution to a portfolio than it is
[473]
to skip a mortgage payment if roger only
manages to save fifty percent of the
[478]
monthly difference between owning his
ending net worth drops to only three
[482]
hundred and thirty four thousand dollars
or what if his portfolio only grows by
[487]
five percent but he manages to save
diligently he still loses as he ends up
[491]
with four hundred and forty five
thousand dollars as you can see the
[496]
variables many of which are unknowable
in advance influence which strategy will
[501]
ultimately work out best but that being
said here's some food for thought
[506]
one many people who think they will rent
and invest the difference end up renting
[512]
and spending a lot of the difference
instead - a lot of people rush into
[517]
homeownership and end up moving after
only a few years or to often be mindful
[523]
of the impact of transaction costs of
buying and selling homes 3 in the real
[529]
world housing prices and investment
portfolios don't move in straight lines
[533]
the real world fluctuations can throw
your projections right out of the window
[537]
for there's no law that says you have to
get a mortgage for whatever you're
[542]
pre-approved for a very wise compromise
might be to buy a more modest home so
[547]
you can be an owner and still have money
left over for investing elsewhere as
[552]
well
Most Recent Videos:
You can go back to the homepage right here: Homepage